[NGW Magazine] Philippines Forges Chinese Ties

A few years ago, the Philippines won a territorial dispute with China in a Dutch court, but neglected to press home that advantage: it has swapped solidarity with other aggrieved Asean members for better trading terms and gas exploration with China.

Setting aside their political differences and overlapping maritime territorial claims, the Philippines is seeking to partner with China to explore for natural gas in the South China Sea. They could also develop LNG infrastructure in a move that is creating angst in the southeast Asian country.

"The MoU for the LNG project will potentially broaden Phoenix Petroleum’s portfolio of new businesses, which now includes LPG, convenience retailing, asphalt, and e-transactions,” Phoenix said.

This follows a statement in April by Philippine foreign affairs secretary Alan Peter Cayetano to the effect that Manila wanted to press ahead with joint oil and gas exploration with Beijing in the South China Sea. “If it’s acceptable to both sides, we could see the joint exploration done soon,” Cayetano told reporters in Hong Kong April 12, following the Boao Forum in Hainan attended by a Philippine delegation. 

Both developments come as Beijing continues to assert itself in the hotly-contested South China Sea where it has overlapping claims with the Philippines, Vietnam, Taiwan, Brunei, Indonesia and Malaysia.

China, for its part, lays claim to around 90% of the water way which not only puts it at odds with its neighbours in the region, but also with the US, Japan, India and Australia, which have recently agreed to beef up efforts to enforce freedom of navigation there.

The Philippines won a landmark case against Beijing’s South China Sea claims in mid-2016 at the Permanent Court of Arbitration at The Hague, but the then-newly elected president Rodrigo Duterte failed to press home his country’s legal victory as he courted Beijing for better bilateral relations and economic concessions.

Running out of gas

Manila’s seeming rush to push ahead with gas development with its giant Asian neighbour comes as the Philippines’ main source of gas supply, the Malampaya offshore gas field in the Philippine Sea near Palawan province, nears depletion. According to the Philippine energy ministry, the field supplies three power plants, providing 40% to 45% of the electricity needs of Luzon, the Philippines’ main island which includes Manila. According to most estimates within the country, the Shell-operated field's gas resources will be depleted by 2022 or 2023.

Malampaya gas field (Credit: Shell)

Manila’s China pivot also comes as several proposed LNG import terminal projects in the Philippines fail to get off the ground. 

The country, with a population of just over 100mn and one of the founders of the Association of Southeast Asian Nations, has tried for years to develop an LNG import terminal but most of these efforts to date have been stymied by regulatory concerns, governmental indecision and worries that interested parties, particularly foreign oil companies and utilities, would not be able to find enough creditworthy off-takers to back projects if they pushed through with LNG development. 

One possible exception is Australia-registered Energy World Corporation, which this year said it has 90%-completed its 130,000 m³ capacity LNG terminal on Pagbilao Island in Quezon province,  some 90 km southeast of Manila and capable of handling up to 3mn metric tons/yr of LNG. 

Going forward, LNG development in the Philippines will still face problems, Ricardo Barcelona, managing director of Barcino Advisers, told NGW.  “LNG's economic size limits the market to the Luzon grid, which has the size and power generators ready to take imported LNG to substitute for depleting Malampaya pipeline gas. This could only happen when a regasification terminal is made available,” he said.

One option, he added, would be to use a floating storage and regasification vessel, which costs about a third as much as land-based alternatives and only takes about two years to be ready for commercial operations. He was not convinced though that the Pagbilao terminal was a serious near-term proposition. 

Rethinking its China strategy

Complicating matters, there is growing backlash in the Philippines against the government’s recent China pivot. That pressure has intensified in the last few weeks amid reports that Beijing has upped the ante in the South China Sea even more by installing anti-ship cruise missiles and surface-to-air missiles in the Spratly Islands.

Stratbase ADR Institute for Strategic and International Studies, a Manila-based think tank, said in a report that Beijing's installation of weapons on Fiery Cross, Mischief and Subi Reefs should be a “wake-up call” for the Duterte administration.

"The most common rationale cited – we are militarily not in a good position to wage war against Beijing – should not be licence to kowtow to China’s every whim. After all, the threat of the use of force constitutes a violation of the United Nations Charter," Stratbase ADR president Manhit said in comments covered by local media.

Carl Thayer, southeast Asia geopolitical expert and emeritus professor at the University of New South Wales in Canberra, said recently that Manila has undervalued its long standing military alliance with Washington as it turns more toward Beijing. 

However, the question that has to be answered is how all of this geopolitical maneuvering with China could play out for the Philippines’ quest for more gas and perhaps more important, how it will affect Beijing’s interaction with other rival South China Sea claimants. 

Stein Tonnesson, a researcher and historian at the Peace Research Institute Oslo (PRIO) and at Uppsala University near Stockholm, told NGW the Philippines' apparent willingness to consider joint exploration for oil and gas between oil companies from both countries is unproblematic if the two governments agree the exploration is happening on the continental shelf of the Philippines, so any tax revenue will go to the Philippines. 

“If, however, the Philippines agrees to joint exploration in an area that belongs to its continental shelf, without any Chinese recognition of this fact, then the Philippines will be in deep, deep trouble,” he said. 

“This would, I assume, be unconstitutional, and in addition it would undermine the UN Convention on the Law of the Sea, which both the Philippines and China have ratified.”

Tonnesson added that the prospect that the Philippine government might venture into such an arrangement, driven by its need for energy, would be deeply problematic for other southeast Asian states with continental shelf claims in the South China Sea, such as Malaysia, Brunei and Vietnam, and indeed for any nation in the world that is eager to uphold international law. 

Tim Daiss